Frank says overdraft protection should be 'opt-in'

Bank overdraft fees as high as $39 on debit card transactions aren't "favors" for consumers if they haven't asked for them, House Financial Services Committee Chairman Barney Frank said.

"We wouldn't be in a situation where we're considering legislation if you would have had an opt-in regime from the beginning," said Frank (D-Mass.), addressing the banking industry at a hearing in Washington on Friday. "Don't do people favors without asking them."

Overdraft programs allow consumers to make purchases even if there's not enough money in their accounts. Lawmakers have criticized banks for enrolling customers in the programs, and charging fees, without their consent.

Legislation under consideration in the House would prohibit financial companies from levying more than one overdraft fee per month or six per year, according to Rep. Carolyn B. Maloney (D-N.Y.), who sponsored the bill.

"It's not simply a question of how much money it is," Frank said. "It's a sense that people's integrity and autonomy have been impaired when you do this to them, and then you tell them you did it for them."

The House bill would make overdraft fees subject to the Truth in Lending Act, requiring consumers' permission before enrolling them, according a statement from Maloney. It would prohibit rearranging the order in which transactions are posted, which can trigger an overdraft. And it would require fees to be in proportion to the amount overdrawn, so a $5 cup of coffee will not have a $35 fee, the statement said.

Bills before both houses

Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) introduced similar overdraft-fee legislation Oct. 19, saying that "banks should not be trying to bolster their profits at the expense of their customers."

Overdraft programs "maximize fees while jeopardizing the financial stability" of customers, said Jean Ann Fox, director of financial services at the Consumer Federation of America. Consumers don't apply for them, and they're not warned at the point of sale when they're about to incur a fee, Fox said. The median fee at the largest U.S. banks is $35, Fox said.

"Rather than competing by offering lower costs and truly beneficial overdraft products and services, many financial institutions are hiding behind a smokescreen of misleading terms and opaque practices that promote costly overdrafts," Fox said.

Rep. Spencer Bachus (R-Ala.) said he avoided overdraft fees with a credit line and asked if many of the problems could be eased with consumer education.

Ending overdraft protection and letting checks bounce would lead to "infinitely worse" consequences for people who don't have sufficient funds, Bachus said.

"I'm not sure people appreciate that," Bachus said. "For people short on cash, it can land them in jail."